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The UK’s precarious journey to decarbonisation

Progress towards decarbonised, or at least low-carbon, electricity generation in the UK is faltering. The challenge of delivering against the 80% CO2 emissions reduction target by 2050, which is only 35 years away, now, looks more than challenging. Not only is there a need to replace coal and gas linked production of electricity, which accounted for 60% of production in 20141, but electrification of transport and heating is likely to necessitate a doubling of generating capacity.

Over 2014 the percentage of electricity production by coal fell from 36.4 % to 29.1 %[1] coinciding with plant conversion and closure, a trend which is set to continue. Coal and oil contain sulphur, which forms sulphur dioxide when the fuel is burned, leading to the creation of acid rain. The EU’s Large Combustion Plant Directive now requires power stations to fit flue gas desulphurisation equipment, trapping the bulk of the emissions, or to close by the end of 2015. Similarly, burning fossil fuels in air creates nitrogen oxides, and the Industrial Emissions Directive requires stations to fit appropriate control equipment by 2020 (or close by 2023). Carbon capture and storage (CCS) technology is unlikely to be retrofitted to coal power stations, as this is uneconomic, and in the present climate it is likely that electricity production by coal will be phased out by 2025-2030 [2]. That is unless the Carbon Floor Price (a tax on carbon emissions) makes fitting of CCS technology favourable – unlikely.

The trend in electricity production by renewables is positive, increasing by nearly 5% in 2014 to a 19.2% share, whilst production linked by gas also rose by a similar amount fuelled by lower gas prices. The intermittency of wind remains an issue without significant storage capacity and thus relies on gas as backup capacity. This coupled with the high technology costs associated with offshore wind means that investment in this sector comes at a price. Whilst the significant investment in offshore wind is to be welcomed, there are growing indications of fragility. Of concern is the fact that imports of electricity from France were at a record high and up 42% in the year 20141.

There is a delicate balance to be struck between the charge towards decarbonisation and meeting demand – a safety margin must be maintained. Ofgem’s 2014 report warns “Margins are expected to fall over the next two winters as older power stations close” [3]. The need to rapidly develop additional capacity in the near term, which is likely to be gas generation, is obvious. However, this is hampered by uncertainty over shale gas extraction and the long term price attached to CO2 emissions (Carbon Floor Price). If the UK is not to crash into the buffers this needs to be resolved speedily.

One thing which is certain about the future is that it is highly uncertain. Another is the UK is going to need a large amount of nuclear energy generation; probably close to 40%. Whilst uncertainty reigns elsewhere, nuclear looks more positive. The Final Investment Decision (FID) around Hinkley Point C looks imminent, with the French (EDF) and Chinese (CGN) reportedly very close to reaching agreement on terms for the investment which will see 5-7% of the UK’s electricity secured for the lifetime of the plant of 60 years. Generation is slated to commence in 2023, with a further nuclear plant scheduled to come on line in 2024. The latter being the construction of a Japanese (Hitachi-GE) Advanced Boiling Water Reactor (ABWR) in Anglesey. Further plant will be constructed at Sizewell C, again an EDF+CGN collaboration, and there is sight of plans for nuclear energy which could bring the UK close to the desired 40%. However, if this level of saturation is to be achieved by 2040-2050 then there is absolutely no room for delay, overrun or overspend.

The scale of change required for a country like the UK is largely unprecedented. Perhaps not on the scale required by China, but then the differences in the political systems make up for that. Deregulation in the electricity markets has been a hurdle that successive governments have struggled to vault. A hugely innovative solution was the invention of the Contracts for Difference (CfD) mechanism. This sees fixed price guarantees for electricity generation, which in the case of EDF will deliver £92.5/MWh for a period of 35 years. It is the long term confidence that this creates which has been the carrot for companies such as EDF to invest. This may be thought of as a market correction.

What is a correction for some is State Aid for others. The European Commission’s review which concluded in 2014 that “the construction and operation of a new nuclear power plant at Hinkley Point in Somerset to be in line with EU state aid rules.” [4], was a blessed relief for the UK government and EDF and was seen as the final green light by many.

The recent move by Austria, and others, to appeal this decision is thus somewhat baffling. Austria is a country which held a referendum in 1978 which rejected nuclear power development by a margin of 0.5%, building instead two coal power plants. It has an abundance of `free’ energy through hydroelectric, which presently accounts for ~55%, with a significant fraction of the remainder being delivered by thermal sources (gas, coal, oil). Austria agreed in Kyoto to reduce greenhouse gas emissions by 13%; compared with 80% agreed by the UK. The UK clearly does not have the benefit of geography which provides the hydroelectric capacity. Nevertheless, Austria still faces challenges in reaching 13% reductions.

An appeal appears to be a visceral anti-nuclear one rather than motivated by imbalance in the electricity markets, given the price agreed for nuclear does not seem out of line with those for a variety of technologies in Germany (e.g. solar) and indeed is cheaper than some (off-shore wind). Indeed, Austria has recently taken the line of seeking to ban import of electricity of a nuclear origin, though it is difficult to know in a grid which electrons journey was created by which power station.

For the UK government this is more than irritating as it could derail its nuclear build programme, jeopardising its own carbon reduction targets and plans for restructuring electricity generation. An appeal could last several years, and time is precious. The reality is that the government may choose to press on with its nuclear new build plans, crossing its fingers that common sense prevails. In the end, it probably has no other choice.